Construction Industry Scheme (CIS): How it works
Construction Industry Scheme (CIS): How it works
The Construction Industry Scheme (CIS) is a tax deduction scheme which applies to payments made by contractors to subcontractors carrying out construction work in the UK.
Unless the subcontractor holds “gross payment status”, the contractor must withhold tax and pay it direct to HMRC: the withholding rate is 20% for registered subcontractors and 30% for unregistered subcontractors.
These rules affect UK businesses and overseas organisations undertaking construction projects in the UK, whether directly or through subcontractors.
The rules can apply to any business, but if your business operates in the construction industry, you need to understand the difference between mainstream contractors and deemed contractors, when exemptions may apply, and when a deemed contractor can deregister.
What counts as construction work?
Construction operations include building, altering, repairing, decorating and demolishing structures, as set by legislation in the Finance Act 2004 S74. The contractual relationships for these operations determine when CIS applies and form the foundation for understanding contractor status.
Who is a contractor under CIS?
A contractor is any business that pays subcontractors for construction work. This includes:
- Organisations whose business specifically involves construction
- Businesses undertaking construction as part of wider operations
- UK and non-UK entities carrying out, commissioning or managing construction activity in the UK
Contractors have specific obligations, including verifying the tax status of their subcontractors, deducting the correct CIS rate, submitting monthly returns and keeping proper records. These duties apply equally to UK and overseas entities where the construction activity takes place in the UK.
Mainstream contractors
Mainstream contractors are businesses whose primary activity is construction. They work regularly with subcontractors and must follow all CIS obligations. Examples include:
- Building contractors
- Construction firms
- Developers with in house or external subcontracted teams
Mainstream contractors must register with HMRC before making payments to subcontractors. Their CIS obligations do not depend on spending thresholds because construction is central to their business.
Deemed contractors
A deemed contractor is a business that is not primarily a construction business but still falls within CIS because of how much it spends on construction operations.
A business becomes a deemed contractor when its construction expenditure exceeds the level set out by HMRC (currently £3m excluding VAT, materials and non-construction costs, if mixed) over a rolling 12month period. Relevant spend includes construction operations carried out for the business, whether through UK-based or overseas project teams.
Typical examples include:
- A retail chain refurbishing UK stores
- A manufacturing group expanding a UK production facility
A US-based or EU-based company developing a UK site through subcontractors
It is important note that a business may not continue to qualify as a deemed contractor after meeting the threshold once - statuses can change as construction activity reduces or projects conclude.
Exemptions for deemed contractors (including regulation 22)
Some payments made by deemed contractors may fall outside CIS. A key exemption applies where construction work is carried out on property used for the business’s own purposes.
Deemed contractors may apply Regulation 22 where the conditions are met. Broadly, this could apply where the construction relates to premises used by the business for its own trade, which is not for sale or to let nor held as an investment.
If there is any uncertainty about whether the exemption applies, businesses should seek advice.
When can a deemed contractor deregister?
A deemed contractor can deregister from CIS once it no longer meets the rolling 12 month threshold (currently £3m excluding VAT, materials and non-construction costs, if mixed) requiring registration. So, deregistration may be appropriate where:
- Construction spend falls below the relevant level over a rolling 12 month period
- An engagement with subcontractors for construction operations ends
- A project is completed and no new projects are planned
Deregistration should be considered carefully to avoid unnecessary reporting.
Contractor responsibilities under CIS
Whether mainstream or deemed, contractors must:
- Register with HMRC
- Verify subcontractors
- Deduct the correct CIS rate
- Submit monthly returns
- Provide payment and deduction statements
- Maintain accurate records.
Overseas organisations – When CIS applies
CIS applies to non-UK entities that carry out, commission or manage construction work in the UK. This includes overseas companies:
- Developing UK property
- Refurbishing UK premises
- Managing long term construction programmes via UK subcontractors
CIS is triggered by the location of the construction activity not the location of the business.
Examples
- A European investment group refurbishing an office building in Manchester may become a deemed contractor and fall within CIS.
- A US retail brand fitting out new UK stores with subcontractors must consider mainstream or deemed status depending on its structure.
- A UK food manufacturer building a new production line may meet the deemed contractor threshold and need to register.
HMRC anti-fraud measures from 6 April 2026
From 6 April 2026, HMRC introduced enhanced anti-fraud measures within the sector aimed at tackling abuse and non-compliance across construction supply chains. These changes significantly increase the risks for all contractors that engage with suppliers involved in deliberate CIS or PAYE non-compliance, even where the contractor is not directly involved in the fraud itself.
Under the new rules, HMRC can take action when a business knew or should have known that a payment, or a CIS deduction claimed, was connected to deliberate non-compliance by another party. This is an objective test and does not require HMRC to prove actual knowledge. Instead HMRC will consider whether, based on the facts, a reasonable business should have recognised the risk.
Where HMRC determines that the ‘knew or should have known’ condition is met, it has wide-ranging powers including the ability to:
- Assess the business for a CIS charge equal to 20% of the payment made, or the value of an incorrect CIS credit claimed
- Apply a penalty of 30% of that assessment
- Immediately remove gross payment status, with a minimum five year bar on re-applying
- Transfer penalties to directors or officers where the behaviour of the entity is attributable to them
The changes place greater emphasis on active and ongoing due diligence. HMRC expects businesses to understand their supply chains and to respond appropriately where risks are identified.
CIS return changes from 6 April 2026
From 6 April 2026, new legislation will reinstate a formal requirement for CIS contractors to submit monthly nil returns where no subcontractor payments are made in a tax month. This applies to all CIS contractors, but it is particularly relevant for contractors that experience periods of inactivity, seasonal work, or gaps between projects.
Since 2015, HMRC found that the absence of mandatory nil returns led to widespread confusion. Contractors that made no payments often failed to notify HMRC of inactivity, which resulted in automatic late filing penalties being raised despite no payments being reportable. Although many of these penalties were later appealed or cancelled, the process proved costly and inefficient for both businesses and HMRC.
Therefore, from 6 April 2026:
- Contractors must submit a monthly CIS300 return for every tax month
- This includes nil returns for registered CIS contractors where no subcontractor payments have been made during the relevant tax month (6th to 5th)
- An exception applies where the contractor notifies HMRC in advance by submitting a six-month inactivity request.
The filing deadline for a nil return is the same as for any other CIS return – 19th of the following month.
For contractors, the change is most relevant where there are seasonal fluctuations in activity, periods between construction projects and months where labour is provided solely by employees rather than subcontractors.
Contractors will now need to ensure that every tax month is covered, either by submitting a CIS return (nil or otherwise), or making an advance notification to HMRC by submitting an inactivity request. Failure to submit a nil return may result in HMRC issuing late filing penalties of up to £3,000.
As a pragmatic solution, HMRC suspended CIS late filing penalties other than the first fixed penalty of £100. From April 2026, with the nil filing requirement back in place, HMRC will reinstate the full CIS late filing penalty regime.
In addition to the first £100 fixed penalty, late filers may subsequently be charged:
- A second fixed penalty of £200 after 2 months
- A tax-geared penalty at 6 months of a minimum of £300 or 5% of any liability which should have been shown on the return
- A further tax-geared penalty at 12 months — the amount of this penalty will depend on why the return was late.
Further CIS administrative changes take effect from 6 April 2026, including the removal of CIS reporting for payments made to certain public bodies as the payments under a construction contract is no longer considered a contract payment.
Common areas of CIS uncertainty
If you are unsure about:
- Whether your business should be treated as a mainstream or deemed contractor
- Whether Regulation 22 applies
- Whether overseas companies you work with are caught by CIS
- Whether deregistration is possible.
Your business may benefit from expert support. Whether you are a UK business or an overseas entity, our team of CIS specialists can support you. Your CIS classification affects your compliance, reporting and cashflow, so be sure to get it right.